Gujarat High Court
Kirtilal Ravchandbhai Sanghavi vs Reserve Bank Of India on 10 February, 2022
Author: Bhargav D. Karia
Bench: Bhargav D. Karia
C/SCA/2518/2022 ORDER DATED: 10/02/2022
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CIVIL APPLICATION NO. 2518 of 2022
With
R/SPECIAL CIVIL APPLICATION NO. 2943 of 2022
==========================================================
KIRTILAL RAVCHANDBHAI SANGHAVI
Versus
RESERVE BANK OF INDIA
==========================================================
Appearance:
MR SHAKTI S JADEJA(5491) for the Petitioner(s) No. 1,2,3,4,5,6,7,8
MR SP MAJMUDAR(3456) for the Petitioner(s) No. 1,2,3,4,5,6,7,8
for the Respondent(s) No. 1,2
==========================================================
CORAM:HONOURABLE MR. JUSTICE BHARGAV D. KARIA
Date : 10/02/2022
ORAL ORDER
1. Heard learned advocate Mr. S.P.Majmudar with learned advocate Mr. Shakti Jadeja for the petitioners through video conference.
2. By these petitions under Articles 226 and 227 of the Constitution of India, the petitioners- who are Ex-directors and guarantors of M/s. Sanghavi Export International Private Limited (In Liquidation) have challenged the order passed by the willful Defaulters Identification Committee (WDIC) and Willful Defaulters Review Committee (WDRC) of the respondent No.2- IDBI Bank Ltd..
Page 1 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022C/SCA/2518/2022 ORDER DATED: 10/02/2022
3. The petitioners have prayed for the following reliefs:
(A) YOUR Lordships may be Pleased to issue & writ of mandamus or & writ in the nature of Mandamus or any other appropriate writ, order or direction quashing and Setting aside the impugned orders / decisions dated 01.09.2021 of respondent no.2 (at.
ANNEXURE-N hereto), 02.02.2021 of respondent no.2 (at ANNEXURE-L. hereto), Notice / communication dated 18.09.2021 of respondent no.2 (at ANNEXURE-O hereto) and impugned Notice dated 28.08.2020 issued by respondent no.2 (at ANNEXURE.E hereto);
B) During the pendency and final disposal of the present petition, YOUR LORDSHIPS may be pleased to stay the operation, implementation and execution of impugned order / decision dated 01.09.2021 of respondent no.2 (at ANNEXURE-N hereto), 02.02.2021 of respondent no.2 (at ANNEXURE-L. hereto) as well as impugned Notice / communication dated 18.09.2021 of respondent no.2 (at ANNEXURE-_O hereto) and may further be pleased to restrain the respondent no.2 from reporting the names of the petitioners to Reserve Bank of India / CIBIL as willful defaulters as well as from publishing the names and photographs of petitioners in newspaper / magazines;
(C) Pass any such other and/or further orders that may be thought just and proper, in the facts and circumstances of the present case."
Page 2 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022C/SCA/2518/2022 ORDER DATED: 10/02/2022
4. Brief facts of the case are as under:
4.1 The petitioners are Ex-Directors of a Private Limited Company- Sanghavi Exports International Pvt. Ltd. (at present under liquidation) which was the original borrower from the respondent No.2-Bank.
4.2 The Original borrower company viz.
M/s. Sanghavi Exports International Pvt. Ltd. was engaged in the business of manufacturing and export of cut and polished diamond and diamond studded jewellary.
4.3 The original borrower Company had availed certain financial facilities from a group of consortium members wherein Bank of India was the lead bank and respondent no.2 Bank is one of the consortium member along with other banks.
4.4 The original borrower-Company defaulted in repayment of the loans and the account of the borrower-Company came to be classified as Non Performing Asset (NPA) by the respondent No.2-Bank. The Lead Bankk of Consortium initiated various recovery proceedings against the borrower Page 3 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022 C/SCA/2518/2022 ORDER DATED: 10/02/2022 Company and the petitioners and others for the recovery of its outstanding amount have filed Original Application being OA/162/2018 u/s. 19 of Recovery of Debts Due to Banks and Financial Institutions Act, 1993 ['RDDBFI Act' for short] before the Debts Recovery Tribunal, Mumbai which is pending for adjudication.
4.5 Vide Notice dated 08.09.2016, the Leader of Consortium, i.e. Bank of India, through its Advocate, issued a Recall Notice to the petitioners and others and asked to pay the outstanding dues. In the said notice, it was mentioned that the account of borrower Company with respondent no.2-bank has been classified as NPA on 31.12.2015.
4.6 On 22.08.2016 Bank of India as a lead Bank of Consortium issued a Demand Notice u/s. 13(2) of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ['SARFAESAI Act' for short] to the borrower-Company and others including the petitioners. Thereafter, the lead Bank of consortium took further action under section-13(4) including section 14 Page 4 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022 C/SCA/2518/2022 ORDER DATED: 10/02/2022 measures for possession the secured assets. The petitioners challenged the Demand Notices dated 22.08.2016 and entire action by preferring Securitization Applications being SA/92/2017 u/s. 17 of SARFAESI Act, 2002 before the DRT, Ahmedabad which vide order dated 14.11.2018, came to be allowed and Demand Notice and all subsequent measures taken on the defective demand notices were quashed and set aside.
4.7 The Lead Bank of consortium -- Bank of India has filed Insolvency Proceedings being CP (IB)3747 /I&BP/MB/2018 under the provisions of Insolvency and Bankruptcy Code, 2016 against the Borrower-Company before the National Company Law Tribunal(NCLT), Mumbai which is admitted by order dated 19.02.2019.
4.8 Thereafter, vide order dated 15.12.2020 passed by NCLT, Mumbai, the borrower-Company is ordered to be liquidated and Liquidator came to be appointed.
4.9 In the meantime, on 09.12.2019, the Lead Bank of consortium -- Bank of India as Page 5 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022 C/SCA/2518/2022 ORDER DATED: 10/02/2022 a lead Bank of Consortium on behalf of BOI and other members of consortium issued Demand Notice u/s. 13(2) of the SARFAESI Act to petitioners and others and thereby called upon them to pay outstanding amount of Rs.822,30,00,000.62p as on 19.02.2019 plus interest, cost and other charges.
4.10 The petitioners submitted their detailed reply/objections u/s. 13(3A) of the Act vide their Reply / Letter dated 31.01.2020 raising various contentions. However, the same were rejected by Bank of India. Thereafter, Bank of India lead Bank of consortium took Symbolic Possession of various secured assets on various dates,
1.e. 12.10.2020, 13.10.2020, 15.10.2020, 26.10.2020. The entire action taken by the banks under SARFAESI Act has been challenged by petitioners and others by way of preferring secularization application being SA/429/2020 u/s. 17 of the SARFESAI Act before the DRT-II Ahmedabad. The said SA/429/2020 is pending for adjudication.
4.11 The respondent no.2 issued a Show- Cause Notice dated 28.08.2020 to the petitioners and others to show cause as to why the names of the petitioners should Page 6 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022 C/SCA/2518/2022 ORDER DATED: 10/02/2022 not be included in the list of "Willful Defaulters" as per Reserve Bank of India(RBI) Guidelines. In the said notice, it was stated that the respondent no.2 has granted Working Capital Facilities of Rs.36 Crore to the original borrower- Company and the borrower-Company did not adhere to the terms and conditions of sanction and defaulted in repayment of facilities and therefore, the loan account has been classified as Non-Performing Asset [NPA] on 17.10.2015. The Willful Defaulters Identification Committee (WDIC) of the respondentno.2 Bank constituted as per RBI Circular on Willful Defaulters dated 01.07.2015 has examined the conduct of the account and utilization of credit facilities and has concluded that the acts/events of willful default have been committed by the petitioners. The respondent no.2-Bank issued the said show- cause notice with regard to Criteria No. 2.2.1(c) and 2.2.1(d) of Master Circular dated 01.07.2015 issued by Reserve Bank of India on Willful Defaulters. The said criteria / grounds are as under:
" (**) The Unit has defaulted meeting its payment / repayment obligations to the lender and has not utilized the finance from the lender for the Page 7 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022 C/SCA/2518/2022 ORDER DATED: 10/02/2022 specific purposes for which the finance was availed of but has diverted the funds for other purposes.
(1) Transferring funds to the
subsidiaries/Group Companies
or other corporate by whatever
modalities.
(2) Routing of funds through any bank other than the lender bank of members of consortium without prior permission of the lender."
4.12 Vide letter dated 10.09.2020, some of the petitioners informed the respondent no.2 Bank that the show-cause notice refers to some Audit Reports of "Deloitte" and "Amit Ray & Co." and therefore it was requested to supply a copy of the same to petitioners to enable them to submit their reply to show-cause notice. It was also mentioned that the persons who were not associated with the Company when any default was stated to have been committed and/or the account of the borrower came to be classified as NPA cannot be identified as "Willful Defaulters" in view of -- section-2(60) of the Companies Act, 2013.
4.13 Vide letter dated 04.11.2020, the petitioners informed the respondent no.2 Page 8 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022 C/SCA/2518/2022 ORDER DATED: 10/02/2022 Bank that despite the bank having concurrent audit, internal audit, quarterly statutory audit, external auditors for audited balance sheets on completion of each financial year and periodical audit by RBI Auditors, there was no requirement for further audit. It was further stated that despite all such audits, there was no adverse observations in the Company's Account / transactions and therefore the forensic audit was unwarranted. It was stated that full co- operation was extended to the forensic auditors and all the requisite data and details including the access to transactions in software were provided to the auditors, without prejudice. It was Stated that as per Notice dated 22.08.2016 issued u/s. 13(2) of the SARFESAI Act, 2002, it was mentioned that the account was classified as NPA on 31.12.2015. The transactions could not be permitted after classification of account as NPA. It was further mentioned that section 18 of the Insolvency and Bankruptcy Code, 2016 (IBC) casts a duty upon the Interim Resolution Professional to collect information in relation to assets, finance or operations of the Page 9 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022 C/SCA/2518/2022 ORDER DATED: 10/02/2022 Corporate Debtor for the last Two Years and the Corporate Code also prevents the abuse of forensic audit as corporate debts may be due to genuine business losses suffered by the corporate debtor arising out of variety of adverse economic condition beyond the control of corporate debtors. As far as Criteria No. 2.2.1(c) mentioned in the show-cause notice dated 28.08.2020 is concerned, the petitioners stated that the borrower-Company has been enjoying age old trustworthy business relations with referred Companies like M/s. Crystal Gems (HK) Ltd., Radiant Exports, Smile Jewellery LLC and Sanghavi Diamonds Inc (N.Y.) on credit and exports under prevalent Forex avenues. The borrower-company has received certain amounts from the aforesaid companies, however balance realizations could not be received due to adverse global recession. It was stated that delayed realizations and outstanding / overdue realizations do not construe any diversion and / or siphoning of funds and therefore, the auditor's comment that the credit sales were made inspite of weak recovery is baseless and untenable and cannot be construed as a Default. It was requested Page 10 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022 C/SCA/2518/2022 ORDER DATED: 10/02/2022 not to identify the petitioners as willful defaulters.
4.15 It is the case of the petitioners that vide letter dated 12.11.2020, the respondent no.2 Bank informed the petitioners that the replies given by petitioners are silent on the transactions with M/s. Arya International and the bank statements of accounts maintained outside consortium is not furnished.
4.16 In reply / letter dated 25.11.2020
in pursuance to aforesaid letter dated
12.11.202 it was contended that the
borrower-Company had entrusted the job
work assignments to M/s. Arya
International (as third party job worker) and the due payment of job work was settled and paid in year 2016 and hence, the bank statements of account are not required to be furnished thereafter in the succeeding years. It was stated that no other bank under the consortium, including the lead bank has ever identified the petitioners as willful defaulters and therefore, it was requested not to classify the petitioners as willful defaulters.
Page 11 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022C/SCA/2518/2022 ORDER DATED: 10/02/2022 4.18 On 31.12.2020, the respondent no.2 Bank issued a Notice to petitioners affording an opportunity of personal hearing before the on 12.01.2021.
4.19 The petitioners remained present on 12.01.2021 via video conference before the WIDC of bank and also submitted their replies dated 12.01.2021. In the said replies, the petitioners reiterated their stand and submitted that after submission of earlier replies by petitioners, there was no further communication/ observations from respondent no.2-Bank and hence it is deemed that the subject matter stood closed. It was requested not to classify the petitioners as willful defaulters.
4.20 The petitioners in the personal
hearing stated that the
dealings have been done with the three
parties in normal course of business and due from the said parties have come down during the last 5 years. As far as charge with regard to routing of funds from non- lenders, it was submitted that all the banks were part of the earlier consortium, however certain banks exited the consortium, but the borrower-Company Page 12 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022 C/SCA/2518/2022 ORDER DATED: 10/02/2022 continued to avail certain services from the banks and local payments were made through these accounts. It was stated that the transactions were part of normal course of businesses and for very minor amount related to expenses. It was stated that the banks have already received ECGC Claim amount from Export Credit Guarantee Corporation of India Ltd. [ECGC].
4.21 It is the case of the petitioner that without considering the detailed contentions and submissions made by the petitioners and without assigning any reason and without even recording the fact of willful default and the reasons for the same, the respondent no.2 Bank passed impugned order / decision dated 02.02.2021, whereby, it was informed that WIDC of respondent no.2- Bank has declared the Petitioners as "Willful Defaulters". It was further observed in the said decision that the petitioners may send their further submission / representation, if any, for the consideration by the Review Committee on Willful Defaulters [WDRC] within 15 days.
4.22 Pursuant to the aforesaid impugned decision, the petitioners submitted a Page 13 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022 C/SCA/2518/2022 ORDER DATED: 10/02/2022 detailed representation dated 15.02.2021 to respondent no.2 Bank. The petitioners reiterated their contentions which were made in earlier representations. It was stated that after the account of borrower- Company being classified as NPA, no debits are permitted and only credits are allowed and no opportunity was afforded for "holding-on" operations, implying that no debit transactions were permitted to continue business transactions. It was stated that without opportunity for debit transactions by respondent no.2 bank, the borrower-Company routed business transactions with other banks/lending institutions by default, to continue business operations. It was stated that the petitioners apprehend that the forensic auditors have not verified the credits and transactions with other banks, lending institutions and submitted reports on the basis of limited records with the bank which cannot be construed as conclusive audit report. It was also stated that except M/s. Sanghavi Diamonds Inc., no other entity is associated / related entity.
4.23 According to the petitioners, without considering the detailed Page 14 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022 C/SCA/2518/2022 ORDER DATED: 10/02/2022 contentions and submissions made by the petitioners in its proper perspective and without assigning any reason for the same, impugned order / decision dated 01.09.2021 was passed whereby it was informed that the 'Willful Defaulters Review Committee (WDRC)' of respondent no.2-bank has confirmed the decision of 'Willful Defaulter Committee' to declare the petitioners as Willful Defaulters and has further informed to report the names of petitioners to all Credit Information Companies and/or RBI.
4.24 Thereafter, on 18.09.2021, the respondent no.2 Bank issued a Notice to the petitioners stating that the petitioners have been declared as Willful Defaulter by the respondent no.2-bank and the same has been reported to RBI/CIC. The petitioners were further called upon to pay the alleged outstanding amount to respondent no.2-bank within 15 days, failing which, it was stated that the bank shall proceed to publish the names and photographs giving other details of petitioners in the newspaper / magazines.
Page 15 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022C/SCA/2518/2022 ORDER DATED: 10/02/2022
5. Learned advocate Mr. Majmudar submitted that respondent No.2-Bank has declared the petitioners as willful defaulters without providing copies of the forensic audit report and report of other audit conducted by the respondent No.2-Bank and therefore, the petitioners have been deprived of the material which is relied upon by the Willful Defaulter Committee of the respondent No.2-Bank which has declared the petitioners as willful defaulters.
5.1 It was submitted that the show-cause notice was issued by the Deputy General Manager of the respondent No.2-Bank and not by the Willful Defaulter Identification Committee ('WDIC'). It was pointed out that the notice dated 28.08.2020 issued to the petitioners by the respondent No.2-Bank is not by the WDIC but by the one Mr. Arvind Bansal, Deputy General Manager who has stated that this communication in form of notice is issued as per the directives of the WDIC of the Bank.
5.2 Learned advocate Mr. Majmudar invited attention of the Court to the reply dated 10.09.2020 to point out that the petitioners specifically requested for the copies of the observations/findings of the audit report and Page 16 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022 C/SCA/2518/2022 ORDER DATED: 10/02/2022 forensic audit report given by the Auditor which are relied upon by the respondent No.2- Bank for alleging diversion of funds by the Company (In Liquidation) as per Clause 2.1.3 of the master circular for willful default issued by respondent No.1-Reserve Bank of India.
5.3 It was submitted that the petitioners have submitted a detailed representations before the WDC on 10.09.2020, 04.11.2020, 12.11.2020 and 25.11.2020. However, such representations and reply to the show-cause notice were not considered by the WDIC.
5.4 It was submitted that even during the course of personal hearing, the petitioners have made written submission on 12.01.2021 with regard to the allegations of diversion of funds made by respondent No.2-Bank for the purpose of declaring the petitioners as willful defaulters but the written submission given by the petitioners is not considered in the communication dated 02.02.2021 of the respondent No.2-Bank declaring the petitioners as willful defaulters on the grounds mentioned in the show-cause notice. It was submitted that the WDIC of the respondent-Bank has not given any reason in the communication dated Page 17 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022 C/SCA/2518/2022 ORDER DATED: 10/02/2022 February 2,2021 which is contrary to the procedure prescribed as per Clause 3 of the Master Circular issued by respondent No.1- Reserve Bank of India on 01.07.2015 which provides for passing an order recording the fact of willful default and the reasons for the same.
5.5 It was submitted that the order/communication dated 02.02.2021 does not contain any reason for declaring the petitioners as willful defaulters and therefore, there is a breach of the mechanism prescribed by the Reserve Bank of India in the master circular.
5.6 It was submitted that the petitioners therefore, made further following submissions on 15.02.2021 before the WDC of the respondent No.2-Bank which was also not considered:
(a) As far as the observations by the Forensic Auditors that no legal action has been taken by the borrower-Company for realization of its debts from the parties of foreign countries is concerned, it was submitted that the borrower Company has been enjoying long and trustworthy business relations with the Companies Page 18 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022 C/SCA/2518/2022 ORDER DATED: 10/02/2022 referred to in the show-cause notice dated 28.08.2020 and that the delayed realisations maybe due to genuine business losses arising out of variety of adverse economic conditions beyond the control of debtors and hasty legal action may spoil the trust which has been build up over number of years. The details of percentage of major recoveries from major overseas buyers have been incorporated in earlier representation dated 12.01.2021.
(b) As far as transfer of Rs.3.41 Crore to borrower-Company's own account with ICICI Bank is concerned, it was stated that the Company has current account with ICICI Bank outside the consortium. The withdrawal facility of Company's account with respondent no.2-bank stood withdrawn after Classification of account as NPA and the Company had no other option available to meet with the fixed and petty expenses, payment of salaries/ wages of employees/labourers etc. and therefore, the transfer of amount to ICICI Bank may not be construed as any misappropriate of funds.
(c) As far as transfer of Rs.4.53 Crores to M/s. Arya International is concerned, Page 19 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022 C/SCA/2518/2022 ORDER DATED: 10/02/2022 it was stated that M/s. Arya International provides skilled and semi-skilled labours.
(d) As far as the last charge of
default, i.e. reduction in outstanding
amount in case of two debtors entities, viz., "BriDiam Rs.10.25 Crore" and "Twenty Two Gems Co. Ltd." Rs.9.30 Crore"
is concerned, it was stated that the forensic auditor has submitted his report on 22.05.2020 when the COVID-19 pandemic was at the peak and there were lockdown/restrictions and containment zones and hence, access was not readily feasible. Under those adverse factors, it is apprehended that the forensic auditor could not have approach/access and did not make discrete enquiries to which details/date could have been arranged for submission it was requested not to classify the petitioners as Willful Defaulters.
5.7 It was submitted that the petitioners approached before the Willful Defaulters Review Committee (for short 'WDRC'] as per the mechanism prescribed in the master circular of the RBI and WDRC provided an opportunity of hearing to the petitioners on July 29, 2021 Page 20 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022 C/SCA/2518/2022 ORDER DATED: 10/02/2022 and passed an order confirming the decision of WDIC on September 1, 2021 which was communicated by the Chief General Manager, NPA Management Group of respondent No.2-Bank to the petitioners. It was therefore submitted that even the order as passed by the WDRC was also not communicated to the petitioners contrary to Clause-3 of the Master Circular of the RBI.
5.8 It was submitted by learned advocate Mr. Majmudar that both, the WDIC and WDRC, have not given any reason to reject the contentions and submissions made on behalf of the petitioners that there is no diversion of funds by the company {In Liquidation] as the transactions were entered into by the company [In liquidation] in normal course of business with four entities which are named in the show cause notice i.e. (I) Crystal Gems (HK) Ltd Rs. 139 Crore, (ii) Radiant Exports- Rs. 184.41 Crore, (iii) Smile Jewellary LLC:-Rs. 73.29 Crore and (iv) Sanghavi Diamonds Inc (NY)- Rs. 45.95 Crore. It was submitted that only one company i.e. Sanghavi Diamonds Inv (N.Y) is related to the petitioners and other three entities are having long term and trustworthy business relations. It was pointed out that all the transactions were routed Page 21 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022 C/SCA/2518/2022 ORDER DATED: 10/02/2022 through prevalent law of the Foreign Exchange and only because amount is not realized by the company [In Liquidation] it would not amount to diversion of funds as held by the WDIC and WDRC of the respondent No.2-Bank. It was further submitted that the company [In Liquidation] has done genuine business and has suffered losses and company [In Liquidation] and the petitioners, who are ex-directors are in business for more than 50 years and as such there was no need to divert the funds of the company [In Liquidation] resulting into declaration of the petitioners as willful defaulters by the respondent No.2-Bank.
5.9 It was submitted that merely because the company [In Liquidation] could not repay the outstanding dues of the respondent No.2-Bank and liquidation proceedings are going on before the National Company Taw Tribunal, the respondent No.2-Bank could not have invoked the RBI master circulation to declare the petitioners as willful defaulters causing stigma on the reputation of the petitioners.
5.10 With regard to the other issues on which the petitioners were declared as willful defaulters on account of routing of funds through ICICI Bank Ltd, it was pointed out Page 22 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022 C/SCA/2518/2022 ORDER DATED: 10/02/2022 that the company [In Liquidation] had current account with the ICICI Bank Ltd. outside the consortium and withdrawal facility with the stood withdrawn after classification of the account as NP Account and therefore the respondent-Company has no other option available to meet with the petty expenses, payment of salary, wages etc and therefore, the stand taken by the WDIC and WDRC of routing the fund through ICICI Bank Ltd. without permission of the respondent No.2-Bank is also not tenable so as to brand the petitioners as willful defaulters.
5.11 It was further submitted that learned advocate Mr. Majmudar in support of his submissions relied upon the decision dated October, 16,2019 of the Bombay High Court in case of Kailash Sahara vs. IDBI Bank Ltd in Writ Petition (L) No. 1630 of 2019 to point out that the Division Bench of the Bpmbay High Court in the said decision has discarded the submission made on behalf of the bank that the bank is not obliged to provide copies of the Identification Committee Report and Review Committee report to the petitioners as they are internal private documents. It was submitted that the Division Bench of the Bombay High Court has further relied upon Page 23 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022 C/SCA/2518/2022 ORDER DATED: 10/02/2022 master circular of the RBI and has held that there is no confidentiality attached to the orders and report of the Identification Committee and that of the Review Committee and on that ground, the orders passed by the Review Committee and Identification Committee was quashed and set aside and the matter was remanded back to the authority for reconsideration.
5.12 Reliance was also placed on the decision of Bombay High Court in case of M/s. Kanchan Motors and ors vs. Bank of India and ors in Writ Petition (L) No. 2072 of 2018 where also, the orders passed by the Identification Committee and the Review Committee were quashed and set aside on account of failure to supply the reasons.
5.13 Further reliance was placed on the decision of this Court (Coram: Hon'ble Mr. Justice G.R.Udhwani, as His Lordships was then] dated 21.09.2020 in case of Subhash Kedarnath Tibreval vs. Bank of Baroda in Special Civil Application No. 7884 of 2020 wherein relying upon the aforesaid decision of the Bombay High Court this Court quashed and set aside the order on declaration of willful defaulter status of the petitioner and Page 24 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022 C/SCA/2518/2022 ORDER DATED: 10/02/2022 remanded the matter back to the bank for extending appropriate opportunity to the petitioner.
5.14 Learned advocate Mr. Majmudar also relied upon the decision of this Court in case of Sonalben Jayeshbhai Patel vs. Bank of India dated 26.11.2020 in Special Civil Application No. 6618 of 2019 and Special Civil Application No. 10215 of 2020 wherein this Court, after considering the aforesaid decision in case of Kailash Sahara of the Bombay High Court, remanded the matter back to the Identification Committee for taking a fresh decision after providing an opportunity of hearing as per Clause-3 of the master circular of the RBI.
5.15 Learned advocate Mr. Majmudar so far as the petitioner of Special Civil Application No. 2943 of 2022 advanced further additional argument that the guarantors cannot be declared as willful defaulters as they were not associated with day-to-day functioning of the Company (In Liquidation) and therefore, merely because the petitioners, who are guarantors who have extended the guarantee to the extent of the mortgaged property, they cannot be declared as willful defaulter.
Page 25 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022C/SCA/2518/2022 ORDER DATED: 10/02/2022
6. I have considered the submissions made by the learned advocates for the petitioners and have also perused the documents produced on record. So far as the contentions raised on behalf of the petitioners that the respondent-Bank has not provided the audit report and the forensic audit report which are relied upon in the show-cause notice with regard to the allegation of diversion of funds routed through the another bank account are concerned, the details of the observations made by the audit reports are stated in the show-cause notice and thereafter the petitioners by various replies and representations have tried to justify on both the issues of diversion of funds and routing of funds through another bank account in detail.
7. In the written submissions filed by the petitioners on 12.01.2021, the petitioners have, in detail, submitted with regard to the forensic audit by stating that the respondent No.2-Bank was not supposed to carry out the forensic audit and the Company (In liquidation) fully cooperated with the forensic auditors and provided all the requisite data and details including the access to the transactions in the software of Page 26 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022 C/SCA/2518/2022 ORDER DATED: 10/02/2022 the company. Thus the petitioners were aware about the conduct of the forensic audit and other audit done by the respondent NO.2-Bank. It is also emerging from the record that the account of the company (In Liquidation) became NPA on 31.12.2015 and thereafter, the proceedings under section 18 of the Insolvency and Bankruptcy Code are initiated and therefore, the petitioners were aware about the facts of the allegations made by in the show-cause notice with regard to diversion of the funds to the subsidiary of the group companies or other corporate as well as routing of funds through the bank other than the lender bank or the members of consortium without prior permission. On perusal of the replies of the petitioners it emerges that the petitioners were aware about the funds blocked with the four entitles viz. (I) Crystal Gems (HK) Ltd- Rs. 139 Crore, (ii) Radiant Exports- Rs. 184.41 Crore, (iii) Smile Jewellary LLC:-
Rs. 73.29 Crore and (iv) Sanghavi Diamonds Inc (NY)- Rs. 45.95 Crore. The auditors on the analysis of the bank statements have observed in the audit report as disclosed to the petitioners in the show-cause notice that Rs.
22.03 Crore were paid to the Crystal Gems (HK) Ltd, Rs. 73.14 Crore paid to the Radiant Exports and Rs. 29.88 Crore were paid to the Page 27 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022 C/SCA/2518/2022 ORDER DATED: 10/02/2022 Smile Jewellary LLC and Rs. 2.24 Crore were paid to the Sanghavi Diamonds Inc (NY). However, none of these four entities appeared in monthly creditors' statements review and there was no realization from these parties resulting into non-payment of the outstanding dues of the respondent No.2-Bank.
8.Considering the above observations in the audit reports, the petitioners have tried to explain in detail before the WDIC by filing its replies and written submissions during the course of personal hearing and petitioners have accepted that one party namely Sanghavi Diamonds Inc (NY) is related party to the petitioners and the company [In Liquidation] However the petitioners did not accept about the fact of diversion of funds.
9. The petitioners have also been heard at length by the WDRC and the order of the WDRC is also provided to the petitioners which is available at Annexure N- page no. 192 of Special Civil Application No. 2518 of 2022 wherein WDRC has given reasons for declaration of the petitioners as willful defaulters. WDRC has observed with regard to diversion of funds that the four entities mentioned are Page 28 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022 C/SCA/2518/2022 ORDER DATED: 10/02/2022 related/associated companies as per the forensic audit report and the transaction having been admitted by the company 9in liquidation). It was also considered by the WDRC no justifiable reasons for non-recovery of the huge amount is given by the company (in Liquidation) or the petitioners. Similarly for routing of funds through the ICCI bank it was not in dispute that no permission of respondent No.2-bank was obtained by the company (in liquidation) or the petitioners even though it was necessary for the company (in liquidation) to use the other bank account but the fact remains that there was no prior permission of the lenders.
10. In view of the above facts which are emerging from the records it would be necessary to refer to the master circular of willful defaulter issued by the RBI on July 1, 2015 which defines willful default as per clause 2.1.3 as under:
"2.1.3 Willful Default: A 'willful default' would be deemed to have occurred if any of the following events is noted.
(a) The unit has defaulted in meeting its payment / repayment obligations to the lender even when it has the capacity to honour the said obligations.Page 29 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022
C/SCA/2518/2022 ORDER DATED: 10/02/2022
(b) The unit has defaulted in meeting its payment / repayment obligations to the lender and has not utilized the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.
(c) The unit has defaulted in meeting its payment / repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the Specific purpose for which finance was availed Of, nor are the funds available with the unit in the form of other assets.
(d) The unit has defaulted in meeting its payment / repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the bank / lender.
The identification of the willful default should be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transactions / incidents. The default to be categorised as willful must be intentional, deliberate and calculated."
11. Clause 2.2.1 refers to diversion of funds and reads as under:
"2.2.1 Diversion of Funds: The term 'diversion of funds' referred to at paragraph 2.1.3(b) above, should be construed to include any one of the undernoted Occurrences:Page 30 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022
C/SCA/2518/2022 ORDER DATED: 10/02/2022
(a)utilization of short-term working capital funds for long-term purposes not in conformity With the terms of sanction;
(b) deploying borrowed Funds for purposes/ activities or creation of assets other than those for which the loan was sanctioned;
(c) transferring borrowed funds to the subsidiaries Group companies or other Cooperates by whatever modalities;
(d) routing of funds through any bank other than the lender bank or members of Consortium without prior permission of the lender;
(e) Investment in other companies by way of acquiring equities/ debt instruments without approval of lenders;
(f)Shortfall in deployment of funds vis-à-vis the amounts disbursed/ drawn and ne difference not being accounted for."
12. As per clause 2.2.1(c) diversion of funds includes transferring borrowed funds to subsidiaries group companies or other corporate by whatsoever modalities. Similarly sub-clause (d) of clause 2.2.1 refers to routing of funds through any bank other than the lender bank or member of consortium without prior permission of the lender.
13. Therefore on perusal of the order passed by the WDRC copy of which is provided to the petitioner and produced by the petitioner at Page 31 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022 C/SCA/2518/2022 ORDER DATED: 10/02/2022 Annexure 'N' refers to breach of both the clauses of diversion of funds and routing of funds from the facts on record and thereafter WDRC after considering the reply of the petitioners, has come to the conclusion about the diversion and routing of the funds by the petitioners and company (In Liquidation) and accordingly, the petitioners are declared willful defaulter.
14. While exercising jurisdiction under Articles 226 and 227 of the Constitution of India this Court is not required to sit in appeal over the findings of facts arrived at by the WDIC or WDRC and therefore there is no need to analyse or review the decision arrived by the authority of the Bank in accordance with the master circular of RBI on the facts of the case as circular is issued pursuant to the instructions of the Central Vigilant Commission for collection of the information on willful default of more than Rs. 25 Lakh by the RBI and dissemination to the reporting bank and financial institution to caution them from advancing further finance to such entity or persons and therefore the RBI has framed the Scheme in the year 1999 which was revised in the year 2002 based on the recommendations of the working group on the willful defaulter Page 32 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022 C/SCA/2518/2022 ORDER DATED: 10/02/2022 and thereafter the same was revised in the year 2015 as per the recommendation of the committee on the data format for furnishing credit information to the Credit Information Companies (CIC) and various feedback received from different stakeholders. Thus, the RBI has framed this scheme for the purpose of furnishing the credit information to CIC so as to prevent further advance of financial assistance to the persons who fall within the scope of willful defaulters as per the master circular of RBI. In such circumstances, no interference is required to be made in the impugned orders passed by the respondent No.2- Bank implementing master circular and declaring the petitioners willful defaulters as per the facts on record.
15. Clause 2.6 of the master circular refers to the guarantees furnished by the individuals, group companies and non-group companies and reads as under:
"2.6 Guarantees furnished by individuals, group companies & non-group companies While dealing with willful default of a single borrowing company in a Group the banks FIS consider the track record of the individual company, with reference to its repayment performance to its lenders. However, in cases where guarantees furnished by the companies within the Group Page 33 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022 C/SCA/2518/2022 ORDER DATED: 10/02/2022 on behalf of the willfully defaulting units are not honoured when invoked by the banks/FIs, such Group companies should also be reckoned as willful defaulters.
In connection with the guarantors, in terms of Section 128 of the Indian Contract Act 1872, the liability of the surety is co- extensive with that of the principal debtor unless it is otherwise provided by the contract. Therefore, when a default is made in making repayment by the principal debtor, the banker will be able to proceed against the guarantor / surety even without exhausting the remedies against the principal debtor. As such where a banker has made a claim on the guarantor on account of the default made by the principal debtor, the liability of the guarantor is immediate. In case the said guarantor refuses to comply with the demand made by the creditor/banker, despite having sufficient means to make payment of the dues, such guarantor would also be treated as a willful defaulter. This treatment of non-group corporate and individual guarantors was made applicable with effect from September 9, 2014 and not to cases where guarantees were taken prior to this date. Bank/FIs may ensure that this position is made known to all guarantors at the time of accepting guarantees."
16. From the above clause of the master circular it is clear that the guarantors would also be treated as willful defaulters if such guarantors refuse to comply with the demand made by the creditors/ bankers despite any means to make payment of the dues and as the liability of the guarantor is co-extensive Page 34 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022 C/SCA/2518/2022 ORDER DATED: 10/02/2022 with that of the principal debtor as per the provision of section 128 of the Indian Contract Act, 1872. Hence, as the petitioners of Special Civil Application No. 2943 of 2022 have admittedly not paid the demand raised by the respondent NO.2 bank, and they are also rightly declared as willful defaulter by respondent No.2 Bank as per the clause 2.6 of the master circular of the RBI. Therefore, submission made by learned advocate Mr. Majmudar that petitioners of Special Civil Application No. 2943 of 2022 cannot be declared as willful defaulters is not tenable.
17. With regard to the decisions relied upon by the learned advocate for the petitioners the said orders and decisions are rendered quashing the orders passed by the Willful Defaulter Identification Committee as well as Review Committee as the bank never supplied a copy of the order and the reasons for arriving at a conclusion with regard to declaration of the borrowers/promoters/guarantors as willful defaulters, whereas in the facts of the case detail order is passed by the WDRC and a copy of the same is provided to the petitioners produced at Annexure 'N' of Special Civil Application No. 2518 of 2022 and in such circumstances, there is no need to give further opportunity of hearing to the Page 35 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022 C/SCA/2518/2022 ORDER DATED: 10/02/2022 petitioners by remanding the matter back to the WDIC or WDRC as no further facts can be pleaded by the petitioner than what is already submitted before the WDRC as recorded in the order dated 01.09.2021 passed by the WDRC. Thus, there is no lacuna can be said to be committed by the respondent No.2 bank with regard to compliance of clause 3 of master circular of RBI. It is true that the WDC has not given any reason in the order passed for declaration of willful defaulter, however, the order passed by the WDRC has considered all the submissions of the petitioner and has given reasons for declaring the petitioners as willful defaulters and therefore only because of such hyper technical ground that WDIC has not given any reason, the action of declaration of willful defaulter cannot be quashed and set aside in view of the reasons given by the WDRC in the order dated 01.09.2021.
18. In view of the foregoing reasons, the petitions are devoid of any merit and are accordingly dismissed.
(BHARGAV D. KARIA, J) JYOTI V. JANI Page 36 of 36 Downloaded on : Sun Apr 24 12:29:31 IST 2022